Value added
Encyclopedia
In economics
, the difference between the sale price and the production cost of a product is the value added per unit. Summing value added per unit over all units sold is total value added. Total value added is equivalent to Revenue less Outside Purchases (of materials and services). Value Added is a higher portion of Revenue for integrated companies, e.g., manufacturing companies, and a lower portion of Revenue for less integrated companies, e.g., retail companies. Total value added is very closely approximated by Total Labor Expense (including wages, salaries, and benefits) plus "Cash" Operating Profit (defined as Operating Profit plus Depreciation Expense, i.e., Operating Profit before Depreciation). The first component (Total Labor Expense) is a return to labor and the second component (Operating Profit before Depreciation) is a return to capital (including capital goods, land, and other property). In national accounts
used in macroeconomics
, it refers to the contribution of the factors of production
, i.e., land
, labour, and capital goods, to raising the value of a product and corresponds to the incomes received by the owners of these factors. The national value added is shared between capital and labor (as the factors of production), and this sharing gives rise to issues of distribution
.
Outside of economics, value added refers to "extra" feature(s) of an item of interest (product, service, person etc.) that go beyond the standard expectations and provide something "more" while adding little or nothing to its cost. Value-added features give competitive edges to companies with otherwise more expensive products.
used up in the production of X.
In national accounts
such as the United Nations System of National Accounts (UNSNA)
or the United States National Income and Product Accounts (NIPA)
, gross value added
is obtained by deducting intermediate consumption
from gross output
. Thus gross value added is equal to net output
. Net value added is obtained by deducting consumption of fixed capital
(or depreciation
charges) from gross value added. Net value added therefore equals gross wages, pre-tax profits net of depreciation
, and indirect taxes less subsidies.
's concept of the value product
is similar to the national accounting concept of net national product, or net value added, since it is the value of the gross product minus expenditure on constant capital
, where the latter refers to the costs of intermediate products and depreciation. In turn, value added is equal to the sum of variable capital (labor's compensation) and surplus-value (pre-tax profit income). The argument is that labor creates a new value (value added) that covers the cost of both its own wages (payment for workers' ability to do labor, i.e. for their labor power
) and surplus-value (property income). In Marx's example in his Das Kapital
, workers exert enough labor-time during a working day to pay for the cost of reproducing their ability to work during that day (their labor-power) and then did extra work (surplus-labor) to pay incomes to capitalists, land-owners, and the like. As labor is the active and conscious factor in the production process, capital goods ("means of production
") and gifts from nature ("land," natural resources) only facilitate labor's transformation of raw materials into other products, raising labor's physical productivity (its ability to produce use-values) and its value-productivity (its ability to produce use-values that can be sold for money).
In contrast, Neoclassical economics
regards the incomes constituting added value as the reward for services rendered. In his critique of political economy
, Marx saw incomes as results of production under conditions of capitalist exploitation. The capitalist class control over the production process and the growth of the economy (capital accumulation
) gives them the power to claim the benefits of the extra labor done by the workforce. This is enforced by the normal existence of mass unemployment, what Marx called the "reserve army of labor."
concerns the interpretation of the distinction between new value created, transfers of value and conserved value, and of the definition of "production
".
For example, Marxist theory regards the "imputed rental value of owner-occupied housing" which is included in GDP as a fictitious entry; if the housing is owner-occupied, this housing cannot also yield real income from its market-based rental value at the same time.
In the 1993 manual of the United Nations System of National Accounts (UNSNA), the concept of "imputed rental value of owner occupied housing" is explained as follows:
"6.89. Heads of household who own the dwellings which the households occupy are formally treated as owners of unincorporated enterprises that produce housing services consumed by those same households. As well-organized markets for rented housing exist in most countries, the output of own-account housing services can be valued using the prices of the same kinds of services sold on the market in line with the general valuation rules adopted for goods or services produced on own account. In other words, the output of the housing services produced by owner-occupier
s is valued at the estimated rental that a tenant would pay for the same accommodation, taking into account factors such as location, neighbourhood amenities, etc. as well as the size and quality of the dwelling itself. The same figure is recorded under household final consumption expenditure
s."
Marxist economists object to this accounting procedure on the ground that the monetary imputation made refers to a flow of income which does not exist, because most home owners do not rent out their homes if they are living in them.
Another important difference concerns the treatment of property rents, land rents and real estate rents. In the Marxian interpretation, many of these rents, insofar as they are paid out of the sales of current output of production, constitute part of the new value created and part of the real cost structure of production. They should therefore be included in the valuation of the net product. This contrasts with the conventional national accounting procedure, where many property rents are excluded from new value-added and net product on the ground that they do not reflect a productive contribution.
(VAT) is a tax on sales. It works by being charged on the sale price of new goods and services, whether purchased by intermediate or final consumers. However, intermediate consumers may reclaim VAT paid on their inputs, so that the net VAT is based on the value added by producing this good or service.
Economics
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...
, the difference between the sale price and the production cost of a product is the value added per unit. Summing value added per unit over all units sold is total value added. Total value added is equivalent to Revenue less Outside Purchases (of materials and services). Value Added is a higher portion of Revenue for integrated companies, e.g., manufacturing companies, and a lower portion of Revenue for less integrated companies, e.g., retail companies. Total value added is very closely approximated by Total Labor Expense (including wages, salaries, and benefits) plus "Cash" Operating Profit (defined as Operating Profit plus Depreciation Expense, i.e., Operating Profit before Depreciation). The first component (Total Labor Expense) is a return to labor and the second component (Operating Profit before Depreciation) is a return to capital (including capital goods, land, and other property). In national accounts
National accounts
National accounts or national account systems are the implementation of complete and consistent accounting techniques for measuring the economic activity of a nation. These include detailed underlying measures that rely on double-entry accounting...
used in macroeconomics
Macroeconomics
Macroeconomics is a branch of economics dealing with the performance, structure, behavior, and decision-making of the whole economy. This includes a national, regional, or global economy...
, it refers to the contribution of the factors of production
Factors of production
In economics, factors of production means inputs and finished goods means output. Input determines the quantity of output i.e. output depends upon input. Input is the starting point and output is the end point of production process and such input-output relationship is called a production function...
, i.e., land
Land (economics)
In economics, land comprises all naturally occurring resources whose supply is inherently fixed. Examples are any and all particular geographical locations, mineral deposits, and even geostationary orbit locations and portions of the electromagnetic spectrum. Natural resources are fundamental to...
, labour, and capital goods, to raising the value of a product and corresponds to the incomes received by the owners of these factors. The national value added is shared between capital and labor (as the factors of production), and this sharing gives rise to issues of distribution
Distribution (economics)
Distribution in economics refers to the way total output, income, or wealth is distributed among individuals or among the factors of production .. In general theory and the national income and product accounts, each unit of output corresponds to a unit of income...
.
Outside of economics, value added refers to "extra" feature(s) of an item of interest (product, service, person etc.) that go beyond the standard expectations and provide something "more" while adding little or nothing to its cost. Value-added features give competitive edges to companies with otherwise more expensive products.
National accounts
The factors of production provide "services" which raise the unit price of a product (X) relative to the cost per unit of intermediate goodsIntermediate consumption
Intermediate consumption is an economic concept used in national accounts, such as the United Nations System of National Accounts , the US National Income and Product Accounts and the European System of Accounts .Conceptually, the aggregate "intermediate consumption" is equal to the amount of the...
used up in the production of X.
In national accounts
National accounts
National accounts or national account systems are the implementation of complete and consistent accounting techniques for measuring the economic activity of a nation. These include detailed underlying measures that rely on double-entry accounting...
such as the United Nations System of National Accounts (UNSNA)
United Nations System of National Accounts
The United Nations System of National Accounts is an international standard system of national accounts, the first international standard being published in 1953...
or the United States National Income and Product Accounts (NIPA)
National Income and Product Accounts
The National Income and Product Accounts are part of the national accounts of the United States. They are produced by the Bureau of Economic Analysis of the Department of Commerce...
, gross value added
Gross value added
Gross Value Added ' is a measure in economics of the value of goods and services produced in an area, industry or sector of an economy...
is obtained by deducting intermediate consumption
Intermediate consumption
Intermediate consumption is an economic concept used in national accounts, such as the United Nations System of National Accounts , the US National Income and Product Accounts and the European System of Accounts .Conceptually, the aggregate "intermediate consumption" is equal to the amount of the...
from gross output
Gross Output
Gross output is an economic concept used in national accounts such as the United Nations System of National Accounts and the US National Income and Product Accounts...
. Thus gross value added is equal to net output
Net output
Net output is an accounting concept used in national accounts such as the United Nations System of National Accounts and the NIPAs, and sometimes in corporate or government accounts. The concept was originally invented to measure the total net addition to a country's stock of wealth created by...
. Net value added is obtained by deducting consumption of fixed capital
Consumption of fixed capital
Consumption of fixed capital is a term used in business accounts, tax assessments and national accounts for depreciation of fixed assets...
(or depreciation
Depreciation
Depreciation refers to two very different but related concepts:# the decrease in value of assets , and# the allocation of the cost of assets to periods in which the assets are used ....
charges) from gross value added. Net value added therefore equals gross wages, pre-tax profits net of depreciation
Depreciation
Depreciation refers to two very different but related concepts:# the decrease in value of assets , and# the allocation of the cost of assets to periods in which the assets are used ....
, and indirect taxes less subsidies.
Marxist interpretation
Karl MarxKarl Marx
Karl Heinrich Marx was a German philosopher, economist, sociologist, historian, journalist, and revolutionary socialist. His ideas played a significant role in the development of social science and the socialist political movement...
's concept of the value product
Value product
The value product is an economic concept formulated by Karl Marx in his critique of political economy during the 1860s, and used in Marxian social accounting theory for capitalist economies...
is similar to the national accounting concept of net national product, or net value added, since it is the value of the gross product minus expenditure on constant capital
Constant capital
Constant capital , is a concept created by Karl Marx and used in Marxian political economy. It refers to one of the forms of capital invested in production, which contrasts with variable capital...
, where the latter refers to the costs of intermediate products and depreciation. In turn, value added is equal to the sum of variable capital (labor's compensation) and surplus-value (pre-tax profit income). The argument is that labor creates a new value (value added) that covers the cost of both its own wages (payment for workers' ability to do labor, i.e. for their labor power
Labor power
Labour power is a crucial concept used by Karl Marx in his critique of capitalist political economy. He regarded labour power as the most important of the productive forces of human beings. Labour power can be simply defined as work-capacity, the ability to do work...
) and surplus-value (property income). In Marx's example in his Das Kapital
Das Kapital
Das Kapital, Kritik der politischen Ökonomie , by Karl Marx, is a critical analysis of capitalism as political economy, meant to reveal the economic laws of the capitalist mode of production, and how it was the precursor of the socialist mode of production.- Themes :In Capital: Critique of...
, workers exert enough labor-time during a working day to pay for the cost of reproducing their ability to work during that day (their labor-power) and then did extra work (surplus-labor) to pay incomes to capitalists, land-owners, and the like. As labor is the active and conscious factor in the production process, capital goods ("means of production
Means of production
Means of production refers to physical, non-human inputs used in production—the factories, machines, and tools used to produce wealth — along with both infrastructural capital and natural capital. This includes the classical factors of production minus financial capital and minus human capital...
") and gifts from nature ("land," natural resources) only facilitate labor's transformation of raw materials into other products, raising labor's physical productivity (its ability to produce use-values) and its value-productivity (its ability to produce use-values that can be sold for money).
In contrast, Neoclassical economics
Neoclassical economics
Neoclassical economics is a term variously used for approaches to economics focusing on the determination of prices, outputs, and income distributions in markets through supply and demand, often mediated through a hypothesized maximization of utility by income-constrained individuals and of profits...
regards the incomes constituting added value as the reward for services rendered. In his critique of political economy
Political economy
Political economy originally was the term for studying production, buying, and selling, and their relations with law, custom, and government, as well as with the distribution of national income and wealth, including through the budget process. Political economy originated in moral philosophy...
, Marx saw incomes as results of production under conditions of capitalist exploitation. The capitalist class control over the production process and the growth of the economy (capital accumulation
Capital accumulation
The accumulation of capital refers to the gathering or amassing of objects of value; the increase in wealth through concentration; or the creation of wealth. Capital is money or a financial asset invested for the purpose of making more money...
) gives them the power to claim the benefits of the extra labor done by the workforce. This is enforced by the normal existence of mass unemployment, what Marx called the "reserve army of labor."
Differences between Marxist and neo-classical accounting of value added
A difference between Marxist theory and conventional national accountsNational accounts
National accounts or national account systems are the implementation of complete and consistent accounting techniques for measuring the economic activity of a nation. These include detailed underlying measures that rely on double-entry accounting...
concerns the interpretation of the distinction between new value created, transfers of value and conserved value, and of the definition of "production
Gross domestic product
Gross domestic product refers to the market value of all final goods and services produced within a country in a given period. GDP per capita is often considered an indicator of a country's standard of living....
".
For example, Marxist theory regards the "imputed rental value of owner-occupied housing" which is included in GDP as a fictitious entry; if the housing is owner-occupied, this housing cannot also yield real income from its market-based rental value at the same time.
In the 1993 manual of the United Nations System of National Accounts (UNSNA), the concept of "imputed rental value of owner occupied housing" is explained as follows:
"6.89. Heads of household who own the dwellings which the households occupy are formally treated as owners of unincorporated enterprises that produce housing services consumed by those same households. As well-organized markets for rented housing exist in most countries, the output of own-account housing services can be valued using the prices of the same kinds of services sold on the market in line with the general valuation rules adopted for goods or services produced on own account. In other words, the output of the housing services produced by owner-occupier
Owner-occupier
An owner-occupier is a person who lives in and owns the same home. It is a type of housing tenure. The home of the owner-occupier may be, for example, a house, apartment, condominium, or a housing cooperative...
s is valued at the estimated rental that a tenant would pay for the same accommodation, taking into account factors such as location, neighbourhood amenities, etc. as well as the size and quality of the dwelling itself. The same figure is recorded under household final consumption expenditure
Household final consumption expenditure
is a transaction of the national account's use of income account representing consumer spending. It consists of the expenditure incurred by households on individual consumption goods and services, including those sold at prices that are not economically significant...
s."
Marxist economists object to this accounting procedure on the ground that the monetary imputation made refers to a flow of income which does not exist, because most home owners do not rent out their homes if they are living in them.
Another important difference concerns the treatment of property rents, land rents and real estate rents. In the Marxian interpretation, many of these rents, insofar as they are paid out of the sales of current output of production, constitute part of the new value created and part of the real cost structure of production. They should therefore be included in the valuation of the net product. This contrasts with the conventional national accounting procedure, where many property rents are excluded from new value-added and net product on the ground that they do not reflect a productive contribution.
Value added tax
Value added taxValue added tax
A value added tax or value-added tax is a form of consumption tax. From the perspective of the buyer, it is a tax on the purchase price. From that of the seller, it is a tax only on the "value added" to a product, material or service, from an accounting point of view, by this stage of its...
(VAT) is a tax on sales. It works by being charged on the sale price of new goods and services, whether purchased by intermediate or final consumers. However, intermediate consumers may reclaim VAT paid on their inputs, so that the net VAT is based on the value added by producing this good or service.
See also
- Added valueAdded valueAdded value in financial analysis of shares is to be distinguished from value added. Used as a measure of shareholder value, calculated using the formula:...
- Gross outputGross OutputGross output is an economic concept used in national accounts such as the United Nations System of National Accounts and the US National Income and Product Accounts...
- Gross value addedGross value addedGross Value Added ' is a measure in economics of the value of goods and services produced in an area, industry or sector of an economy...
- Intermediate consumptionIntermediate consumptionIntermediate consumption is an economic concept used in national accounts, such as the United Nations System of National Accounts , the US National Income and Product Accounts and the European System of Accounts .Conceptually, the aggregate "intermediate consumption" is equal to the amount of the...
- Economic value addedEconomic value addedIn corporate finance, Economic Value Added or EVA, a registered trademark of Stern Stewart & Co., is an estimate of a firm's economic profit – being the value created in excess of the required return of the company's investors . Quite simply, EVA is the profit earned by the firm less the cost of...
- National accountsNational accountsNational accounts or national account systems are the implementation of complete and consistent accounting techniques for measuring the economic activity of a nation. These include detailed underlying measures that rely on double-entry accounting...
- Measures of national income and output#The output approach
- Productive and unproductive labourProductive and unproductive labourProductive and unproductive labour were concepts used in classical political economy mainly in the 18th and 19th century, which survive today to some extent in modern management discussions, economic sociology and Marxist or Marxian economic analysis...
- Unproductive labour in economic theoryUnproductive labour in economic theoryUnproductive labour is labour which does not further the end of the system. Therefore this concept has sense only with reference to a determined system. In classical economics the end is growth and development, in Marxian economics the end is capitalistic profit and in business the end is to place...
- Surplus-value
- United Nations System of National Accounts (UNSNA)
- Value (marketing)Value (marketing)The value of a product is the mental estimation a consumer makes of it. Formally it may be conceptualized as the relationship between the consumer's perceived benefits in relation to the perceived costs of receiving these benefits...
- Value-added theoryValue-added theoryValue-added theory was first proposed by Neil Smelser and is based on the assumption that certain conditions are needed for the development of a social movement...
- Value-added resellerValue-added resellerA value-added reseller is a company that adds features or services to an existing product, then resells it as an integrated product or complete "turn-key" solution...
- Value productValue productThe value product is an economic concept formulated by Karl Marx in his critique of political economy during the 1860s, and used in Marxian social accounting theory for capitalist economies...